US Core PCE Inflation Holds at 2.9%, Consumer Spending Rises 0.5%

WASHINGTON, Aug. 29 (Reuters) - U.S. consumer spending climbed a solid 0.5 percent in July, while the Federal Reserve’s preferred inflation gauge-the Personal Consumption Expenditures (PCE) price index-showed underlying price pressures ticked higher, underscoring both resilient demand and the impact of import tariffs on the economy.

The Commerce Department reported that the headline PCE price index increased 0.2 percent last month, matching June’s rise and holding the annual rate steady at 2.6 percent. Excluding volatile food and energy components, core PCE rose 0.3 percent from June and jumped to 2.9 percent year-over-year, up from 2.8 percent.

Archivists of U.S. economic policy watch the core PCE index closely, as it remains the Fed’s favored inflation metric. The modest uptick in July’s core inflation comes amid growing bets that the central bank will begin lowering interest rates at its September meeting, with market-implied odds of a quarter-point cut at 84 percent.

Despite persistent underlying price pressures, July’s robust spending gain-the largest increase in consumer outlays since March-reflects continued demand, supported by healthy wage growth and low unemployment. However, economists note that tariffs imposed on a range of imports have begun to feed through into consumer prices for goods, from furniture to household appliances.

Federal Reserve Chair Jerome Powell, speaking at the Jackson Hole symposium earlier this month, acknowledged rising downside risks to the labor market and indicated that a series of rate cuts could be warranted if upcoming data disappoints. The PCE report reinforces the view that, while inflation remains above the Fed’s 2 percent target, it is gradually abating and likely will not derail an imminent policy easing.

Looking ahead, investors will shift their focus to Friday’s August employment report, which could overshadow the inflation update if job growth slows markedly.

• Mike Dolan and Peter Henderson

(Reporting by Mike Dolan; Editing by Andrea Ricci)